The Association Between Web‐Based Corporate Performance Disclosure and Financial Analyst Behaviour Under Different Governance Regimes

• Author: Walter Aerts,Michel Magnan,Denis Cormier
• Published date: 01 November 2007
• Date: 01 November 2007
• DOI: http://doi.org/10.1111/j.1467-8683.2007.00648.x

The Association Between Web-Based

Corporate Performance Disclosure

and Financial Analyst Behaviour

Under Different Governance Regimes

Walter Aerts*, Denis Cormier and Michel Magnan

In this study, we assert and test that the determination of corporate performance communica-

tion and f‌inancial analysts’ earnings forecasting work are closely intertwined processes. The

resulting endogeneity in capital markets’ information dissemination and use is strongly inf‌lu-

enced by a country’s governance regime. Results from simultaneous equation regressions

show signif‌icant interrelationships between f‌inancial analysts’ activities and corporate disclo-

sure transparency for North American f‌irms. Moreover, analyst following underlies corporate

disclosure, which ultimately leads to a reduction in the dispersion of analysts’ earnings

forecasts. In contrast, capital markets’ information dynamics for continental European f‌irms

are much weaker.

Keywords: Analyst following, analysts’ forecasts, corporate governance, corporate disclosure,

media exposure, corporate performance disclosure, product market competition, web

reporting

Introduction

Our purpose in this article is to assess, and

to compare, how North American and

continental European f‌irms choose the quality

of their web-based performance disclosure

and how such disclosure affects f‌inancial ana-

lysts. More specif‌ically, the paper assesses how

web-based corporate performance disclosure

affects analysts’ forecasts on three comple-

mentary aspects: (1) Does corporate perfor-

mance disclosure convey new information

to f‌inancial analysts? (2) Is the information

content of corporate performance disclosure

affected by the number of analysts following

the f‌irm? (3) How do the different governance

regimes of continental Europe and North

America affect f‌inancial analyst reaction to

corporate performance disclosure? The paper

is based on the premise that, while f‌inancial

disclosure attracts considerable attention

from the regulatory, media or f‌inancial com-

munities, other socio-economic activities

do provide relevant information to assess

the f‌irm’s future economic prospects. Our

theoretical framework essentially relies on the

economics of corporate disclosure literature

(e.g. Roberts, 1992; Scott, 1994; Richardson

and Welker, 2001). However, we extend

such literature by mapping it into the political

view of corporate governance put forward

by Roe (2003) to explain between-continent

differences.

Prior research documents that in many

industries there is a def‌inite value-creation

process by which paper-based nonf‌inancial

performance information is a lead indicator for

future earnings, which, ultimately, translate

into stock market performance (e.g. Amir and

Lev, 1996; Ittner and Larcker, 1999). These

f‌indings imply that, in forecasting a f‌irm’s

earnings, f‌inancial analysts should rely on cor-

porate performance information that extends

beyond the f‌irm’s f‌inancial disclosures, such as

the status of intangibles, customer satisfaction,

corporate governance practices, risk manage-

*Address for correspondence:

Faculty of Applied Economics,

University of Antwerp, Prins-

straat 13, 2000 Antwerpen,

Belgium. Tel: 003232204110;

E-mail: walter.aerts@ua.ac.be

WEB-BASED CORPORATE PERFORMANCE DISCLOSURE AND FINANCIAL ANALYST BEHAVIOUR 1301

Volume 15 Number 6 November 2007

© 2007 TheAuthors

Journal compilation © 2007 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA

ment, product development and reliability,

human capital, sustainable development, etc.

Financial analysts’ forecasts may proxy for the

quality of managerialmonitoring that is taking

place (Leuz, 2003). As information intermedi-

aries, f‌inancial analysts play a critical role in

the functioning of capital markets and in

the production of f‌irm-specif‌ic information.

Chang et al. (2000) equate disclosure transpar-

ency (or the availability of f‌irm-specif‌ic in-

formation) with robust analyst activity and

accurate analyst forecasts. Through a f‌irm’s

web site, performance information can actu-

ally be providedon a continuous cost-effective

basis. There exists some evidence that corpo-

rate web sites have become an important

source of information for f‌inancial analysts. In

a case study of Royal Philips Electronics’ web

site use, the authors document that f‌inancial

analysts represented 11 per cent of total web

site traff‌ic over a four-week period after quar-

terly earnings announcements (Hodge and

Pronk, 2007). In that regard, the analysis of

web-based performance disclosure and how it

affects and ultimately is affected by the behav-

iour of f‌inancial markets’ participants such as

shareholders and f‌inancial analysts is an

emerging research area. For instance, Bollen

et al. (2006) also look at Internet corporate dis-

closure but focus on Investor Relations activi-

ties only, a relatively small subsection of

corporate web sites.

However, for f‌inancial analysts, web-based

performance disclosure may either represent

relevant incremental disclosure or be simply

an alternative information source that repli-

cates disclosure that is available through other

means (e.g. annual report). We ascertain this

question by focusing strictly on how HTML

format performance disclosure that is not

mandated by regulatory agencies interfaces

with analyst forecasts’ dispersion and ana-

lyst coverage. Moreover, previous research

(although mainly in the US) suggests that

the properties of analystearnings forecasts, the

level of analyst following of a f‌irm and the

extent and quality of a f‌irm’s disclosure prac-

tices are to a signif‌icant extent simultaneously

determined (Alford and Berger, 1999; Hope,

2003a). These simultaneous relationships

imply considerable information dynamics at

the f‌irm level, whereby the level and quality of

the analystservices and the disclosure position

of a f‌irm inf‌luence each other.

Capital markets’ information dynamics are

likely to also be driven by political and insti-

tutional settings. Bushman et al. (2004) report

that f‌inancial reporting transparency varies

across countries in ways that are consistent

with their political regimes. Hence, an interna-

tional perspective to examine whether the

information dynamics surrounding corporate

disclosure can be generalised to other institu-

tional contexts seems warranted. More specif‌i-

cally, despite an abundance of prior empirical

research, there is limited evidence regard-

ing the comparative information dynamics of

European and North American capital mar-

kets when the scope of disclosure extends

beyond f‌inancial reporting. Comparing North

American and continental European capital

markets, signif‌icant institutional differences

emerge. These differences are deemed to affect

the way f‌inancial analysts interact with corpo-

rate disclosure information. For instance, dif-

ferences in corporate governance mechanisms

between continents will affect a company’s

disclosure strategy. Intrusive legislations that

lead labour to be involved in corporate gover-

nance as well as block ownership both provide

less incentive for management to engage in

high-quality corporate disclosure (Roe, 2003).

In such a context, corporate disclosure is less

likely to affect f‌inancial analysts’ work.

There is extensive evidence thatanalyst fore-

casts in a North American context do impound

quickly and eff‌iciently any information that

f‌irms may convey about their future outlook

(e.g. Lang and Lundholm, 1996; Bushman

et al., 2004). The numbers involved, as well as

the geographical dispersion of analysts in the

United States, ensure thatAmerican f‌irms face

a critical audience when reporting to inves-

tors. Overall, some argue that, compared to

continental European stock markets, the US

stock market is the most eff‌icient in the way it

collects and analyses information, the most

liquid and the most transparent in matters of

corporate disclosure (Saudaragan and Meek,

1997). Each continent’s institutional context

provides managers and analysts with differen-

tial incentives to either produce or use corpo-

rate performance information. For instance,

Pope (2003) suggests that the eff‌iciency of

analyst behaviour is not only a function of the

quality of information disclosed and of the

wider information environment (including

accounting and disclosure rules), but also of

available skills and incentives. Differential

incentives and skills of f‌inancial analysts may

affect the demand for and supply of company-

specif‌ic information.

Our results from simultaneous equation

regressions document signif‌icant interrela-

tionships between f‌inancial analysts’ activities

and corporate disclosure transparency for

North American f‌irms. We observe that analyst

following drives corporate performance dis-

closure and results in performance disclosure

that tends to reduce the dispersion of analysts’

earnings forecasts. The effect of performance

disclosure on analyst forecasts’ dispersion is

1302 CORPORATE GOVERNANCE

Volume 15 Number 6 November 2007 © 2007 TheAuthors

Journal compilation © BlackwellPublishing Ltd. 2007